SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 .
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number 1-8060.
AQUARION COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 06-0852232
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
835 Main Street, Bridgeport, Connecticut 06604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 335-2333
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, no par value New York Stock Exchange
Series A Junior
Participating Preferred New York Stock Exchange
Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part IV of this Form 10-K or any amendment to
this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant: $239,251,194
(Computed by reference to the closing price of the Registrant's Common Stock
on March 5, 1998, as reported on the New York Stock Exchange-Composite Tape.)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 5, 1998
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Common Stock, no par value 7,386,780
The following documents have been incorporated by reference:
1. Annual Report to Shareholders for the year ended December 31,
1997--PART I, Item 1; PART II, Item 5, Item 6, Item 7 and Item 8;
PART IV.
2. Definitive Proxy Statement, dated March 25, 1998, for the Annual
Meeting of Shareholders to be held on April 29, 1998--PART III.
PART I
ITEM I. BUSINESS
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General
Aquarion Company (Aquarion or the Company) is a holding company whose
subsidiaries are engaged both in the regulated utility business of public
water supply and in various nonutility businesses.
Aquarion's utility subsidiaries, BHC Company (BHC) and Sea Cliff Water
Company (SCWC) (collectively the Utilities) collect, treat and distribute
water to residential, commercial and industrial customers, to other utilities
for resale and for private and municipal fire protection. The Utilities
provide water to customers in 30 communities with a population of
approximately 500,000 people in Connecticut and Long Island, New York. These
communities include those served by other utilities to which water is made
available by the Company's Utilities on a wholesale basis for back-up supply
or peak demand purposes through the Southwest Regional Pipeline. BHC is the
largest investor-owned water company in Connecticut and with SCWC is among the
10 largest investor-owned water companies in the nation. The Utilities are
regulated by several state agencies, including the Connecticut Department of
Public Utility Control (DPUC) and the New York Public Service Commission
(PSC).
The Company owns Timco, Inc. (Timco), a timber processing company based
in New Hampshire. At Timco's sawmill complex, lumber is cut and packaged for
sale to wholesalers and retailers. Aquarion is also engaged in the utility
management service business through Aquarion Management Services, Inc. (AMS)
and owns Main Street South Corporation (MSSC), a real estate subsidiary formed
in 1969 to assist BHC in marketing surplus land.
The Company was incorporated in Delaware as The Hydraulic Company in
1969 to become the parent company to BHC, a Connecticut corporation founded in
1857. The corporate name was changed to Aquarion Company in 1991. The
Company's executive offices are located at 835 Main Street, Bridgeport,
Connecticut 06604-4995, and its telephone number is (203) 335-2333.
Recent Developments
Discontinued Operation
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On March 25, 1997, the Company executed the stock purchase agreement,
effective December 31, 1996, completing the sale of Industrial and
Environmental Analysts, Inc. (IEA), its environmental testing laboratory
business for approximately $10,000,000. Accordingly, IEA's results were
recorded as a discontinued operation for the years ended December 31, 1996 and
1995. The Company recorded an after tax loss of $4,255,000 or $0.61 per share
from the sale of the discontinued operation for the year ended December 31,
1996.
Merger
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Effective at the close of business on December 31, 1996, Bridgeport
Hydraulic Company merged with its wholly-owned subsidiaries Stamford Water
Company (SWC), New Canaan Water Company (NCWC) and Ridgefield Water Supply
Company (RWSC). Bridgeport Hydraulic Company is the surviving corporation and
has changed its name to BHC Company. BHC consists of an Eastern division,
formerly Bridgeport Hydraulic Company, and a Western division, formerly SWC,
NCWC and RWSC.
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Real Estate
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In February 1997, Aquarion and its BHC subsidiary entered into a
contract to sell its 730-acre Trout Brook Valley property for approximately
$14,000,000, contingent on the buyer's receipt of the required permits from
various local and state agencies to develop the property. The buyer has
applied for the necessary project permits. Trout Brook Valley consists of 640
acres owned by BHC and 90 acres owned by Aquarion. Because BHC property is
included, the sale must also by approved by the DPUC. The anticipated
closing date is expected to be in 1999, but could be extended because of
regulatory appeals. The Company anticipates that the after-tax gain from this
transaction will be approximately $6,000,000 over an applicable amortization
period, assuming similar treatment is allowed by the DPUC as in the past with
regard to the sharing of proceeds between the shareholders and the ratepayers.
Certain environmental groups and others have opposed the granting of the
required permits and approvals. No assurances can be given at this time that
such permits and approvals will be granted.
In March 1997, the Company also entered into a non-binding letter of
intent with the City of Shelton, Connecticut to sell six parcels of land
located in Shelton for approximately $7,000,000. The purchase is contingent
upon the execution of a contract of sale, regulatory and Board approvals. The
anticipated closing date is expected to be late 1998. The Company anticipates
that the after-tax gain from this transaction will be approximately $2,500,000
over an applicable amortization period, assuming similar treatment is allowed
by the DPUC as in the past with regard to the sharing of proceeds between
shareholders and the ratepayers. No assurances can be given at this time that
the required contingencies will be satisfied.
MSSC presently owns a two-third share, through a joint venture, of
approximately 7.7 acres of real property in Shelton, Connecticut. In December
1997, the joint venture was formally notified of an eminent domain action
undertaken on behalf of the City of Shelton, with an accompanying notice of
value of approximately $95,000. Based on this notice of value, the loss on
this transaction will be approximately $387,000. The Company plans to
negotiate a higher value or appeal this notice of value.
Rates. On July 31, 1997, BHC's Eastern Division received a
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decision from the DPUC approving a 12.7 percent water service rate increase,
which became effective on August 1, 1997, designed to provide an $8,300,000
increase in annual water service revenues. This increase which replaced the
Construction-Work-In-Progress (CWIP) rate surcharge, which was 9.49 percent,
prior to July 1, 1997, resulting in a 3.2 percent marginal increase in water
rates. BHC's Eastern and Western Divisions' rates reflect the repeal of the
Connecticut gross earnings tax for services rendered after July 1, 1997, which
resulted in a 5.0 percent reduction in rates and expenses.
Financing Activities. On February 3, 1997, BHC converted
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the interest rate on its $30,000,000 unsecured note, issued in 1995, in
consideration for a loan of the proceeds from the issuance by the Connecticut
Development Authority (CDA) of an equal amount of tax-exempt Water Facilities
Revenue Bonds, from a weekly variable rate to a fixed rate. The bonds bear
interest at 6.15 percent and are due on April 1, 2035.
Utility Construction Program
The Utilities expended $27,633,000, $37,185,000 and $38,600,000 in 1997,
1996 and 1995 respectively, for plant additions and modifications of existing
plant facilities, excluding an allowance for funds used during construction
(AFUDC). The 1997 expenditures were made primarily for construction of a
water treatment plant at Hemlocks reservoir and installation of water mains,
service connections and meters. On July 2, 1997, the William S. Warner Water
Treatment Plant at
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Hemlocks Reservoir was fully operational and put into
service. Utility budgeted capital expenditures for 1998 are approximately
$17,300,000. Management cannot predict whether future federal, state or local
regulation will require additional material capital expenditures.
The Company's ability to finance its future construction programs
depends in part on future rate relief, the level of CWIP rate surcharges and
future debt and equity issuances. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital Resources
and Liquidity" and "Business--Public Water Supply--Rates and Regulation".
Industry Segment Information
The Company's operations are grouped into four industry segments:
public water supply; timber processing; real estate; and utility management
services. The consolidated operating revenues of the Company for the year
ended December 31, 1997 were derived from the following sources: 81 percent
from public water supply, 15 percent from timber processing, 3 percent from
real estate, including both MSSC and surplus utility land sales, and 1 percent
from utility management services. For additional information concerning each
segment for each of the years ended December 31, 1997, 1996 and 1995, see
"Note 10" of "Notes to Consolidated Financial Statements" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Public Water Supply
Service Area. The Utilities are engaged in the collection,
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treatment and distribution of water for public and private use to residential,
commercial, and industrial users, and for municipal and private fire
protection services in 30 communities in parts of Fairfield, Litchfield and
New Haven counties in Connecticut and Nassau County in Long Island, New York.
BHC also sells, as requested, water for redistribution to customers of the
Second Taxing District Water Department of the City of Norwalk, Connecticut,
and Connecticut-American Water Company through the Southwest Regional Pipeline
in Fairfield County.
The communities served by the Utilities as of December 31, 1997 have a
population of approximately 500,000, and the total number of customer accounts
as of that date was approximately 139,000. The Utilities' service areas,
primarily residential in nature, have experienced an average growth in
accounts of approximately 1 percent per year over the last 10 years.
Industrial use has declined significantly in that time period, and the
residential characteristics of the area have changed, indicating an increase
in the percentage of apartment dwellings and condominium units. Management
does not anticipate any significant growth in residential consumption in the
foreseeable future, and expects continued decline in industrial use and little
or no commercial growth.
The operating revenues of the Utilities for the 12 months ended December
31, 1997 were derived from the following sources: 62 percent from residential
customers, 16 percent from commercial customers, 4 percent from industrial
customers, 14 percent from fire protection customers, and 4 percent from other
sources.
Seasonality. The business of the Utilities is subject to
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seasonal fluctuations and weather variations. The demand for water during the
warmer months is generally greater than during the cooler months, primarily
due to additional water requirements of industrial, commercial and residential
cooling systems, and various private and public outdoor uses such as lawn and
golf course sprinkling. From year to year and season to season, demand will
vary with rainfall and temperature levels.
Water Supply. Water is available from both surface and
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subsurface sources. During 1997,
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approximately 88 percent of the water supplied by the Utilities
was provided by impounding reservoirs, 11 percent by
producing wells and 1 percent by purchased water. As of December 31, 1997,
the Utilities' reservoirs, well fields and interconnections with other water
utilities had an aggregate safe daily yield of 113 million gallons. Safe
yield is an estimate of the supply capability during an extended drought. The
average daily demand for water from the Utilities in 1997 was 68 million
gallons per day (MGD). The reservoirs of the Utilities have an aggregate
storage capacity of 30.4 billion gallons.
Management believes it has an adequate water supply to satisfy the
current and projected needs of its customers within its territorial service
area through at least the year 2040. During historical drought periods in the
northeastern United States, BHC has been able to accommodate the needs of its
own customers and to offer relief to supplement the supplies of neighboring
communities by water sales to utilities with which it has pipeline
interconnections. Supply and distribution needs of the Utilities undergo
constant review, and the Utilities continue to explore and develop additional
ground water-supplies and study alternative surface water sources to meet
anticipated future water requirements.
The Connecticut Water Diversion Policy Act, enacted in 1982, prohibits
any future diversions of surface or ground water, greater than 50,000 gallons
per day, without a permit from the state Department of Environmental
Protection (DEP). Although this law "grandfathers" surface and ground-water
supplies that existed when it was enacted, any subsequent water diversion that
might be effected by BHC is subject to a lengthy permit application process
and approval by the DEP. Diversion permits granted pursuant to this law are
subject to renewal when their terms, which typically run from five to ten
years, expire.
Rates and Regulation. The Company's utility subsidiaries
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are subject to regulation by state regulatory commissions having jurisdiction
over their respective service areas. BHC is subject to regulation by the
DPUC, while SCWC is subject to regulation by the PSC. The authorities have
jurisdiction with respect to rates, service, accounting procedures, issuance
of securities, dispositions of utility property and other related matters.
Rates charged by the Utilities are subject to approval by the DPUC or the PSC.
The Utilities continually review the need for increases in water rates, and
historically have sought rate relief in a timely manner in light of increases
in investment in utility plant, operating costs and related financing costs,
as well as other factors.
The DPUC may allow a surcharge to be applied to rates in order to
provide a current cash return to water utilities on the major portions of CWIP
applicable to facilities, including filtration plants, required for compliance
with the Safe Drinking Water Act (SDWA). See "Environmental Regulations."
The surcharge is adjusted quarterly, subject to DPUC approval, to reflect
increased CWIP expenditures for SDWA facilities. BHC has no current plans to
apply for such a surcharge, which has been granted to BHC in the past.
Aquarion is neither an operating utility company nor a "public service
company" within the meaning of any state and is not currently subject to
general regulation by the DPUC or PSC. Regulatory approval is necessary,
however, before Aquarion may acquire or exercise control over any public
service company. Regulatory approval is also required before any other entity
can acquire or exercise, or attempt to exercise, control over Aquarion.
Connecticut regulations govern the sale of water company land in
Connecticut and treatment of land sale proceeds. See "Item 2. Properties."
The profitability of the operations of the water utility industry
generally and of the Utilities (and hence the Company) is largely dependent on
the timeliness and adequacy of the rates allowed by
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utility regulatory commissions. In addition, profitability is dependent
on numerous factors over which the Utilities have little or no control, such as
the quantity of rainfall and temperature in a given period of time, industrial
demand, prevailing rates of interest for short and long-term borrowings, energy
rates, and compliance with environmental and water quality regulations. In
addition, inflation and other factors beyond the Company's or the Utilities'
control impact the cost of construction, materials and employee costs.
Franchises and Competition. Consistent with most water
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companies in Connecticut, BHC derives its rights and franchises to operate
from special acts of the Connecticut General Assembly, which are subject to
alteration, amendment or repeal by the General Assembly and which do not grant
exclusive rights to BHC in its service areas.
Subject to such power of alteration, amendment or repeal by the
Connecticut General Assembly and subject to certain approvals, permits and
consents of public authority and others prescribed by statute and by its
charter, BHC has, with minor exceptions, valid franchises free from burdensome
restrictions and unlimited as to time, and is authorized to sell potable water
in the towns (or parts thereof) in which water is now being supplied by BHC.
In addition to the right to sell water as set forth above, the
franchises of BHC include rights and powers to erect and maintain certain
facilities on public highways and grounds, all subject to such consents and
approvals of public authority and others as may be required by law. Under the
Connecticut General Statutes, BHC, upon payment of compensation, may take and
use such lands, springs, streams or ponds, or such rights or interests therein
as the Connecticut Superior Court, upon application, may determine is
necessary to enable BHC to supply potable water for public or domestic use in
its franchise areas.
BHC faces competition, presently not material, from a few private water
systems operated within, or adjacent to, its franchise areas and from
municipal and public authority systems whose service areas is some cases
overlap portions of BHC's franchise areas. At the present time, except as
noted above, there are no publicly owned utilities, cooperatives or other
private utility companies competing with BHC in the areas now served, although
within certain areas there are wells owned by individuals or private
industries. SCWC faces competition from municipal and public authority
systems whose service areas, in some cases, overlap portions of SCWC's service
area.
Environmental Regulations. The Utilities are subject to
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regulation by the Connecticut Department of Public Health (DPH) and the County
of Nassau Department of Health (CNDH) with respect to water quality matters,
use of water from surface and subsurface sources, the location, construction
and operation of water supply facilities and the sale of certain utility
property. Plans for new water supply systems or expansion of existing water
supply systems also must be submitted to the DPH or CNDH for approval. The
Connecticut Department of Environmental Protection (DEP) is authorized to
regulate the operations of BHC, while the New York Department of Environmental
Conservation (DEC) Regulates the operations of SCWC, with respect to
environmental pollution abatement, diversion of water from surface and
subsurface sources, and the location, construction and alteration of dams and
other water obstructions.
The Utilities are subject to regulation of discharges to the environment
(air, water, land, underground storage tanks and hazardous materials) under
the provisions of the Federal Clean Air Act, Clean Water Act and other
legislation which provides for the establishment of various environmental
regulations by the EPA. A joint federal and state permit system has been
established to ensure that the impact to the environment from operations is
minimized.
The Utilities are subject to regulation of drinking water quality under
the SDWA, which
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provides for the establishment of uniform minimum national
quality standards by the Environmental Protection Agency (the EPA), as well as
governmental authority to specify the type of treatment process to be used for
public drinking water. EPA regulations issued pursuant to the SDWA set limits
for, among other things, certain organic and inorganic chemical, physical,
microbiological and radiological contaminants. The SDWA provides that the
states have the primary enforcement responsibility for public drinking water
systems, as long as the states' regulations are no less stringent than those
adopted pursuant to SDWA. For certain of these water quality standards the
DPH has adopted regulations that in some instances impose standards more
stringent than those imposed under the federal regulations.
EPA regulations pursuant to SDWA include the Surface Water Treatment
Rule (SWTR), the Total Coliform Rule (TCR) and the Lead and Copper Rule (LCR)
and other rules covering organic and inorganic chemicals. The water treatment
requirements of SWTR mandate the construction of the filtration plant at BHC's
Hemlocks Reservoir. On July 1, 1997, the Warner Treatment Plant at Hemlocks
Reservoir was fully operational and placed into service. BHC has entered into
a consent agreement with the DPH to filter the water produced from the Round
Pond reservoir in Ridgefield, CT or substitute alternative ground water supply
by June 30, 1998. The Company is presently addressing these issues with the
DPH. The TCR affects the Utilities by the imposition of requirements for
additional biological sampling and monitoring. The stringent requirements of
the TCR may also result in increased public notification relating to water
quality. The LCR establishes corrosion control techniques and requires
monitoring to determine compliance with prescribed lead and copper levels in
drinking water. If such levels are exceeded, a multi-year program involving
additional monitoring, public notification , state-supervised corrosion
control and treatment and replacement of lead service lines could result. All
of the Utilities' systems are in compliance with the LCR, and the Utilities
continue to monitor these systems periodically. The DPH has determined that
BHC is in compliance with Synthetic Organic Chemical and Inorganic Chemical
requirements, thereby avoiding additional potentially significant treatment
process construction costs. Further SDWA-related regulations are anticipated
for such water quality parameters as disinfection by-products, radon and
enhanced surface water treatment. It is impossible to determine at this time
the ultimate impact these regulations will have on the Utilities.
In 1996, the SDWA was reauthorized by Congress and signed into law.
Several of the schedules for implementation of various regulations have been
changed. The new law eliminated the requirement to regulate 25 new
contaminants every three years and replaced it with a requirement that the EPA
consider five new contaminants for regulation every five years. The 1996 law
also requires that the EPA, in proposing any new drinking water regulations,
show that such regulations will improve public health. In addition, such
regulations must be subjected to a cost-benefit analysis.
Water quality tests are made continuously at all of the Utilities' water
supply sources, and the Utilities believe they are in substantial compliance
with regulations promulgated in connection with the organic chemical,
inorganic chemical, physical, and bacteriological standards for drinking
water. BHC is presently addressing, with the DPH, an issue of elevated radium
levels in a small system purchased in July 1997. BHC has been voluntarily
monitoring for giardia and cryptosporidium, radon and disinfection by-
products, which are water quality concerns that will be addressed by future
regulations.
The Utilities believe that they are in substantial compliance with the
SDWA regulations promulgated by the EPA and DPH, as currently applied.
Although the Utilities cannot predict either the substance of the regulations
required by the 1996 SDWA amendments which have not yet been promulgated or
their impact on the Utilities, the primary impact on the Utilities is expected
to be in the area of increased monitoring and reporting, although it is
possible that such regulations may require modifications to existing
filtration facilities. Construction of new facilities may be required
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for certain groundwater sources. It is possible that costs of compliance by
the Utilities could be substantial.
Aquifer protection legislation in Connecticut requires each water
utility to conduct ongoing groundwater data collection and to map critical
wellfield recharge areas. The DEP, in consultation with the DPH and DPUC, has
discussed recommendations for land use restrictions adjacent to public water
supply wellfields and possible acquisition of land to enhance protection. The
discussions have not lead to additional regulations and, therefore, any impact
cannot be determined at this time. However, if BHC were to adopt
recommendations to purchase additional land around its wellfield, the cost
could range from minimal to substantial.
Developments with respect to the identification and measurement of
various elements in water supplies and concern about the effect of such
elements on public health, together with possible contamination of water
supplies, may in the future require the Utilities to modify all or portions of
their various water supplies, to develop replacement supplies or to implement
new treatment techniques. Any such developments may significantly increase
the Utilities' operating costs and capital requirements. The Company expects
that all such expenditures and costs should ultimately be recoverable through
rates for water service, but there can be no assurance that this will be the
case.
Certain dams owned by the Utilities are subject to inspection under the
National Dam Inspection Act, as well as the Connecticut Dam Registration Act,
and dams owned in New York are subject to inspection by the New York State
Department of Environmental Conservation. The Utilities own 29 dams, 16 of
which are subject to federal inspection. Although certain modifications and
further studies have been required, no material problems with respect to these
dams have been reported to the Company.
The Utilities are required to obtain permits from the respective
regulatory authority for the location, construction or alteration of any dam
or reservoir, and to secure the approval of the regulatory authority for the
diversion and use of water from any surface or ground source for public use.
The Utilities have taken all compliance actions required to date.
Timber Processing
The Company is engaged in the timber processing business through Timco,
which operates a sawmill complex in New Hampshire. The sawmill complex
processes and markets kiln-dried, finished eastern white pine and other
lumber. Timco also provides custom kiln drying services for pine mills in
Maine and southern New Hampshire. Lumber produced by Timco is used in the
remodeling and do-it-yourself markets and, to a lesser extent, in the
construction of new homes. It is marketed in the Northeast and Mid-Atlantic
regions through lumber wholesalers, distributors and, in some instances,
directly to large volume retailers. Wholesalers and distributors, in turn,
sell the lumber to the construction trade and to retail outlets. Timco
obtains the timber used in its products from independent loggers and from
purchased timber rights.
Traditionally, the demand for Timco's lumber is lower in the winter
months and inventories are built up in anticipation of the busier spring and
summer season. The lumber products industry is very competitive, on the basis
of quality and price. Timco faces competition on the basis of both quality
and price from domestic and foreign forest product companies, many of which
have greater resources than the Company.
Utility Management Services
The Company, through its AMS subsidiary, provides clients with an
integrated range of utility
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management services, including contract management
and operations, information services, water and wastewater billing and
collections and various engineering, operations and management consulting
services. AMS clients are private and municipal water and wastewater
utilities, including systems engaged in privatization initiatives. The
utility management services businesses are highly competitive.
Real Estate
The Company treats real estate as a separate business segment in order
to distinguish the earnings impact from sales of surplus utility land from the
results of utility operations. For a discussion of the surplus off-watershed
land which BHC intends to market as appropriate, see "Item 2 Properties."
Employees
As of December 31, 1997, the Company and it's subsidiaries employed
approximately 393 persons on a full-time basis, including 266 in the Public
Water Supply business, 124 in the Timber Processing business and 3 in the
Utility Management Services business. None of the Company's employees is
covered by collective bargaining arrangements, and the Company believes its
relations with its employees are satisfactory.
ITEM 2. PROPERTIES
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The properties of the Utilities consist of land, easements, rights
(including water rights), buildings, reservoirs, standpipes, dams, wells,
supply lines, treatment plants, pumping plants, transmission and distribution
mains and conduits, mains and other facilities and equipment used for the
collection, purification, storage and distribution of water. The Utilities
own their principal properties in fee. The Utilities believe that their
properties are in good operating condition. Water mains are located, for the
most part, in public streets and, in a few instances, are located on land
owned by the Utilities in fee and land occupied under easements, most of which
are perpetual and valid and sufficient for the purpose for which they are
held. Although it is impractical to investigate the validity of the title to
some of the easements held by the Utilities for distribution mains or to clear
title in the cases where such distribution easements titles have been found
defective, any such irregularities or defects in title which may exist do not
materially impair the use of such properties in the businesses of the
Utilities.
BHC owns a 20,000-square-foot headquarters building and a 44,370-square-
foot Operations Center in Bridgeport, a 28,000-square-foot office building in
Monroe, Connecticut and leases an additional 22,000-square-feet of office,
laboratory and garage space in Bridgeport for utility operations.
At December 31, 1997, BHC owned in the aggregate 17 active reservoirs,
59 producing wells and approximately 1,984 miles of water mains, of which
approximately 83 miles have been laid in the past five years. The rights to
locate and maintain water transmission and distribution mains are secured by
charter, easement and permit and are generally perpetual. Water is delivered
to the distribution system from three major reservoir systems, comprised of
several smaller reservoirs and producing wells. BHC owns six filtration
plants for treatment of its reservoir system. These plants have capacities
ranging from .75 to 50 MGD, respectively.
SCWC owns four acres of land in Long Island, New York in four separate
locations that are occupied by an office and pump station, two well sites and
a tank site. SCWC also owns 54 miles of water mains.
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Aquarion owns nonutility land totaling approximately 99 acres in Easton
and Litchfield, Connecticut. BHC owns approximately 20,000 acres of real
property, most of which consists of reservoirs and surrounding watershed,
located in Fairfield, New Haven, and Litchfield counties in Connecticut and in
Pound Ridge and Lewisboro New York. All but 1,360 specified acres of such
property are subject to the first lien arising under the BHC Indenture
securing its First Mortgage Bonds.
The DPH regulates Connecticut Company lands according to a three-tiered
classification system. Class I lands cannot be sold, leased or transferred.
The DPH may authorize transfer or change in use of Class II lands only upon a
finding that there will be no adverse impact upon the public water supply and
that any use restrictions required as a condition of transfer are enforceable
against subsequent owners and occupants of the lands. Class III lands, which
are off-watershed, are not currently subject to regulation by the DPH. BHC
has identified approximately 2,700 acres of land it believes are surplus to
its water supply needs, and therefore would qualify as Class III land. All of
this Class III land, which includes approximately 570 acres that have never
been in rate base, is available for sale, although all of it may not be
marketable.
Real property may not be sold or transferred by a water utility without
the prior approval of the DPUC and compliance with other restrictions imposed
by Connecticut law. State laws and regulations govern, among other things, to
whom certain water company lands may be transferred, with preference given to
other water companies, the municipality in which the property is located and
the State of Connecticut, in that order. Additionally, the disposition of the
proceeds of any permissible sale is subject to state law.
The Equitable Sharing Statute, required the DPUC to use an accounting
treatment to "equitably allocate" the economic benefits of the net proceeds
from the sales of Class III land that was previously in the utility's rate
base between the Company's ratepayers and its shareholders. The Equitable
Sharing Statute provides that the economic benefits from the sale of former
rate base, Class III land shall be allocated "substantially in favor" of
shareholders when 25 percent or more of the land sold is to be used for open
space or recreational purposes. Ratepayers do not share in gains from the
sale of land that has never been in rate base.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The registrant has nothing to report for this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The registrant has nothing to report for this item.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- ------------------
Page 31 of the Company's Annual Report to Shareholders for the year
ended December 31, 1997 is incorporated by reference herein pursuant to Rule
12b-23 of the Securities and Exchange Act of 1934 (the Act) and to Instruction
G(2) to Form 10-K.
Aquarion has declared and paid quarterly dividends on its common stock
without interruption since its organization in 1969 and, prior thereto, BHC
paid dividends annually on its common stock without interruption since 1890.
Dividends, when declared, are normally paid on the 30th day of
9
January, April, July and October.
The earnings of Aquarion are derived from its investments in its
subsidiaries, particularly BHC. Aquarion's future ability to pay dividends to
holders of its Common Stock is dependent upon the continued payment by BHC of
dividends to Aquarion. BHC's ability to pay dividends will depend upon timely
and adequate rate relief, compliance with restrictions under certain of the
BHC debt instruments and other factors.
Dividends on Aquarion common stock can be paid only from its net profits
and surplus. Aquarion's ability to pay dividends is further restricted by the
terms of Aquarion's 5.95 percent unsecured Senior Note due January 1999
(Aquarion Note). As of December 31, 1997, the applicable restrictions would
have permitted payment of additional dividends on Aquarion's common stock of
up to $40,133,000.
While Aquarion's Board of Directors intends to continue the practice of
declaring cash dividends on a quarterly basis, no assurance can be given as to
future dividends or dividend rates since they will be determined in light of a
number of factors, including earnings, cash flow, and Aquarion and BHC's
financial requirements. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Capital Resources and
Liquidity".
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
See the inside front cover ("Selected Financial Data") and Pages 30 - 31
("Supplemental Financial Data") of the Company's Annual Report to Shareholders
for the year ended December 31, 1997, which is incorporated by reference
herein pursuant to Rule 12b-23 of the Act and Instruction G(2) to Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
See the inside front cover ("Selected Financial Data") and Pages 9 - 14
of the Company's Annual Report to Shareholders for the year ended December 31,
1997, which is incorporated by reference herein pursuant to Rule 12b-23 of the
Act and Instruction G(2) to Form 10-K.
ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The consolidated financial statements, together with the report thereon
of Price Waterhouse LLP, dated January 28, 1998, appearing on Pages 15 - 29,
the inside front cover ("Selected Financial Data") and Pages 30 - 31
("Supplemental Financial Data") of the accompanying 1997 Annual Report to
Shareholders of Aquarion Company are incorporated by reference herein pursuant
to Rule 12b-23 of the Act and Instruction G(2) to Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
The registrant has nothing to report for this item.
10
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information as to directors required by Item 10 is set forth at
Pages 1 - 7 of the Company's Definitive Proxy Statement, dated March 25, 1998
relating to the proposed Annual Meeting of Shareholders to be held on April
29, 1998, filed with the Commission pursuant to Regulation 14a under the Act,
and is incorporated by reference herein pursuant to Rule 12b-23 of the Act and
Instruction G(3) to Form 10-K.
Executive Officers
The executive officers of the registrant are listed below. These
officers were elected to the offices indicated on April 22, 1997, except as
otherwise noted, for a term expiring with the 1998 annual meeting of
directors. Except as indicated, all have been with registrant and its
predecessors in an executive capacity for more than five years. There are no
family relationships among members of the executive officers. There were no
arrangements or undertakings between any of the officers listed below and any
other person pursuant to which he or she was selected as an officer.
Served
Office, Business Experience as Officer
Executive Age During Past Five Years Since
Officer
-------------- ------ --------------------------------------------- ------
Richard K. 53 President and Chief Executive Officer (since 1993
Schmidt October 1995),formerly Senior Vice President
(1993-1995) of the Company; President (1992-
1995 and Chief Executive Officer (since 1992
o f IEA); formerly President and Chief
Operating Officer (1984-1992) of Mechanical
Technology, Inc.
Janet M. Hansen 55 E x ecutive Vice President (since October 1983
1995), Chief Financial Officer (since April
1992), Treasurer (since 1988) and Senior Vice
President (1993-1995) of the Company and Vice
P r esident (since 1989), Chief Financial
Officer (since April 1991) and Treasurer
(since 1985) of BHC; Mrs. Hansen is Chairman
of the Board and Chief Executive Officer
(since April 1992) of Timco. Mrs. Hansen is
also Director, Vice President, Chief
Financial Officer and Treasurer of certain of
the Company's other subsidiaries.
James S. 60 Senior Vice President (since April 1992) of 1989
McInerney the Company; President (since April 1991),
Chief Executive Officer (since April 1995 and
Chief Operating Officer (January 1990 to
April 1995) of BHC. Executive Vice President
(1990 to April 1991) of BHC. Mr. McInerney
is a Director, President or Vice President of
certain of the Company's other subsidiaries.
11
Larry L. 48 Vice President, Corporation Relations and 1990
Bingaman Secretary (since April 1993); Vice President,
Marketing and Communications (1990-1993) of
the Company. Mr. Bingaman is also Director,
Vice President and Secretary of certain of
the Company's other subsidiaries.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Pages 8 - 14 of the Company's Definitive Proxy Statement, dated March
25, 1998, relating to the proposed Annual Meeting of Shareholders to be held
on April 29, 1998, filed with the Commission pursuant to Regulation 14a under
the Act are incorporated by reference herein pursuant to Rule 12b-23 of the
Act and Instruction G(3) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Pages 4 - 5 of the Company's Definitive Proxy Statement, dated March 25,
1998, relating to the proposed Annual Meeting of Shareholders to be held on
April 29, 1998, filed with the Commission pursuant to Regulation 14a under the
Act, are incorporated by reference herein pursuant to Rule 12b-23 of the Act
and Instruction G(3) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The registrant has nothing to report for this item.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
a) The following documents are filed as part of this report:
Page in Annual
Report*
------
(1) Consolidated Statements of Income for
the three years
ended December 31, 1997 15
Consolidated Balance Sheets at December 16 - 17
31, 1997 and 1996
Consolidated Statements of Cash Flows
for the three years ended December 31, 18
1997
Consolidated Statements of Shareholders'
Equity for the three years ended 19
December 31, 1997
Notes to Consolidated Financial 20 - 28
Statements
Report of Independent Accountants 29
Selected Financial Data Inside Front Cover
12
Supplemental Financial Information 30 - 31
* Incorporated by reference from the indicated pages of the
1997 Annual Report to Shareholders.
-----------------------------------
(b) Reports of Form 8-K.
The Company did not file a report on Form 8-K for the fourth
quarter of the year ended December 31, 1997.
(c) Exhibits:
Each document referred to below is incorporated by reference
to the files of the Commission, unless the reference is
preceded by an asterisk (*). Each management contract,
compensatory plan or arrangement required to be filed as an
exhibit hereto is preceded by a double asterisk (**).
3(a) Restated Certificate of Incorporation of Aquarion, as
amended. (1)
3(b) By-laws of Aquarion, as amended. (4)
4(a) Rights Agreement between Aquarion and the ChaseMellon
Shareholder Services, L.L.C. setting forth
description of Preferred Stock Purchase Rights
distributed to holders of Aquarion Common Stock. (11)
10(a)First Mortgage Indenture of BHC dated June 1, 1924. (2)
10(b)Seventeenth Supplemental Mortgage of BHC dated
as September 1,1960. (2)
10(c)Twentieth Supplemental Mortgage of BHC dated
as of November 1, 1968. (1)
10(d)Loan and Trust Agreement of Timco as of
November 1, 1984. (1)
10(e)Note Agreement of BHC dated January 24, 1991. (10)
10(f)Note Agreement of Aquarion dated as of May 19, 1992. (5)
10(g)Aquarion Long-Term Incentive Plan. (1)
10(h)Joint Venture Agreement between John J. Brennan, Jr.,
William A. Brennan and Main Street South Corporation
dated February 23, 1979. (3)
10(i)Joint Venture Agreement amendment between John
J. Brennan, Jr., William A. Brennan and Main Street
South Corporation dated January 1, 1994. (10)
13
**10(j)Employment Agreement between Aquarion and
James S. McInerney, dated June 1, 1990. (4)
**10(k)Employment Agreement between Aquarion and
Janet M. Hansen dated November 1, 1992. (5)
**10(l)Employment Agreement between Aquarion and
Jack E. McGregor dated July 1, 1997.
**10(m)Form of Stock Option Award Agreement for options
granted pursuant to Long-Term Incentive Plan. (9)
**10(n)Employment Agreement between Aquarion and
Larry L. Bingaman dated June 11, 1990. (10)
10(o)Agreement for Construction Management Services dated
April 18, 1991 between BHC and Gilbane Building
Company. (1)
* **10(p)Employment Agreement between Aquarion and
Richard K. Schmidt dated July 1, 1997. (10)
**10(q)Employment Agreement between Industrial and
Environmental Analysts, Inc. and David C. Houle dated
October 1, 1995. (10)
10(r)Loan Agreement of BHC dated as of June 1, 1990. (4)
10(s)Revolving Credit Agreement of Aquarion dated
May 14, 1993. (6)
10(t)Revolving Credit Agreement amendment dated
May 12, 1994. (9)
10(u)Loan Agreement of BHC dated as of June 1, 1993. (6)
10(v)Loan Agreement of BHC dated September 1, 1993. (7)
10(w)Loan Agreement of BHC dated December 1, 1993. (8)
10(x)Note Agreement of Aquarion dated January 4, 1994. (8)
**10(y)Aquarion Stock Incentive Plan. (8)
10(z)Loan Agreement of BHC dated April 1, 1995. (10)
10(aa)Agreement between Aquarion and SRK, Inc.
dated January 31, 1996. (10)
10(bb)Loan Agreement of BHC dated September 1, 1996 (12)
*13(a)Annual Report to Shareholders for the year
ended December 31, 1997.
*21(a)Subsidiaries of Aquarion
*23(a)Consent of Independent Accountants
14
*27(a)Financial Data Schedule
-------------------------------------------
(1) Filed as part of Aquarion's Form 8 Amendment to its
Form 10-Q for the quarter ended September 30, 1991, filed February 19,
1992.
(2) Filed as an Exhibit to BHC's Registrant Statement on
Form S-1, File Number 2-23434, dated April 26, 1965.
(3) Filed as part of the Amendment No. 1 to the Company's Registration
Statement as Form S-7, File No. 2-74305, dated November 5, 1981.
(4) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1991.
(5) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1992.
(6) Filed as part of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993.
(7) Filed as part of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
(8) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1993.
(9) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
(10) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
(11) Filed as part of the Company's Registration Statement on
Form 8-A, file #1-8060, dated June 26, 1996.
(12) Filed as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Aquarion Company
(Registrant)
By /S/JANET M. HANSEN
------------------------------------------------------------
March 24, 1998
Janet M. Hansen
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been, signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /S/GEORGE W. EDWARDS, JR.
- -----------------------------------------------------------------
March 24,1998
George W. Edwards, Jr.
Chairman of the Board of Directors
and Director
By /S/RICHARD K. SCHMIDT
-----------------------------------------------------
March 24,1998
Richard K. Schmidt
President, Chief Executive Officer
and Director
By /S/JACK E. MCGREGOR
-----------------------------------------------------
March 24, 1998
Jack E. McGregor
Director
By /S/GEOFFREY ETHERINGTON
-----------------------------------------------------
March 24, 1998
Geoffrey Etherington
Director
By /S/JANET D. GREENWOOD
----------------------------------------------------
March 24, 1998
Janet D. Greenwood
Director
By /S/DONALD M. HALSTED, JR.
----------------------------------------------------
March 24, 1998
Donald M. Halsted, Jr.
Director
By /S/EDGAR G. HOTARD
-----------------------------------------------------
March 24, 1998
Edgar G. Hotard
Director
By /S/G. JACKSON RATCLIFFE
------------------------------------------------------
March 24, 1998
G. Jackson Ratcliffe
Director
By /S/JOHN A. URQUHART
--------------------------------------------------------
March 24, 1998
John A. Urquhart
Director
16
EXHIBIT 21(a)
-------------
Subsidiaries of the Registrant
-----------------------------
- BHC Company, incorporated in the State of Connecticut
- Sea Cliff Water Company, incorporated in the State of New York
- Main Street South Corporation, incorporated in the State
of Connecticut
- Timco, Inc., incorporated in the State of Connecticut
- Hydrocorp, Inc., incorporated in the State of Delaware
- THC Acquisition Corp., incorporated in the State of Delaware
- Aquarion Management Services, Inc., incorporated in the State
of Delaware
17
EXHIBIT 23(A)
-------------
Consent of Independent Accountants
-----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement of Form S-3 (No. 33-52973) and in the Registration Statement on Form
S-8 (No. 33-53473) and the related prospectus of Aquarion Company of our
report dated January 28, 1998, appearing on Page 29 of the Annual Report to
Shareholders, which is incorporated by reference in the Annual Report on Form
10-K.
Price Waterhouse LLP
New York, New York
March 24, 1998
18